 |
|
 |
Sovereign Risks
By: Dr. Charles Lieberman, Chief Investment Offiver
Date: 7/19/2010
Fitch upgraded Argentina's bonds to B (stable) from Default last week, a rather questionable decision. Argentina and a few others belong in a special class, recidivist sovereign borrowers who default on a regular basis after they've lured new lenders to provide them with fresh money. It makes little sense to upgrade Argentina and downgrade Greece because its budget cutbacks are not politically popular. It is doubtful Argentina will act responsibly any time soon.
Argentina has a long history of populist governments that hire too many citizens with generous benefits, generous government spending programs, (and the usual amount of graft) and then turns its back on lenders, or blames the lenders for its own fiscal profligacy, when the market becomes unwilling to lend them more money. Argentina's pattern is well established and they seem to default every twenty years or so. They spend as much money as lenders will give them and impose a harsh settlement when they are unable to keep borrowing. It shows how forgetful lenders can be that Argentina is able to borrow even a nickel in the international debt markets. The current government fits right into this mold. Its populist policies do not auger for responsible fiscal policy in the near future. Anyone buying Argentine bonds today needs to believe they will be able to get out before others try to exit, or think the next default lies far enough into the future that their bond purchases will mature before that day of reckoning. Good luck.
Venezuela is another of the borrowers headed down this slippery slope. Because it is so rich in oil, Venezuela should not need to borrow money internationally. However, Chavez spends every dime of oil revenue and more, so he supplements oil money by expropriating assets from foreign (and domestic) companies to finance his agenda. Anyone who owns Venezuelan bonds believes he will get out before Chavez unilaterally declares a moratorium on interest payments or thinks the bonds are already below the value they will realize on a default. This is a very risky game.
In contrast, Greece has a severe budget problem, but the rest of Europe will act as a cop to make sure Greece fixes its budget problem. Unlike Argentina and Venezuela, Greece's current government is responsible and understands they must fix the problem. It is possible Greece is already too deeply in debt to resolve its mess, so a default could happen anyway. But, this is decidedly a very different situation than Argentina or Venezuela. Greece deserves outside support, since they are making a serious effort towards fiscal responsibility.
Download this article in PDF Format
|
|
